savings

Expect a lower rate on November's I bond

Highlights
  • The I bond is a 30-year inflation-fighting savings bond.
  • Earnings on the I bond has two parts -- at a variable and a fixed rate.
  • It may make sense to buy I bonds before November's rate release.

Put away the party hats, November's I bond announcement will be a less than momentous occasion. Rate expectations for the new I bond are very low.

"I expect the new rate will be below 1 percent, possibly 0.8 percent or 0.9 percent. That is based on my expectation of the fixed return component at 0.1 percent or 0.2 percent and a 0.74 percent annualized rate of change in the CPI," says Greg McBride, CFA, Bankrate senior financial analyst.

The I bond is a 30-year inflation-fighting savings bond issued by the government to help savers hang on to their buying power.

The earnings rate on the I bond is based on two numbers. The first is a fixed rate; the second is a variable rate.

A new fixed rate will be announced Nov. 1. That rate will apply to all I bonds issued between November and May, and it will stick with the bond throughout its 30-year life span. In May, a new fixed rate is announced that will be applied to I bonds issued May through November.

The variable rate component changes every six months. A new variable rate is announced in May and November based on inflation changes during the previous six-month period and is applied to all outstanding I bonds.

In calculating the variable rate, the Treasury looks at the unadjusted U.S. Consumer Price Index for All Urban Consumers, or the CPI-U. For the November rate announcement, the clock started ticking in March, with an index of 217.631. It ended with an index for September of 218.439, which equals a six-month increase of 0.37 percent.

The six-month percentage change is doubled to get the annualized rate of change in the U.S. Consumer Price Index and the new I bond variable rate.

Time to buy?

If you're considering an I-bond purchase, it may make sense to buy before November's rate announcement.

"I would probably invest a little more prior to the November date, but you're probably flipping a coin at this point," says Herbert Hopwood, CFP, president of Hopwood Financial Services in Great Falls, Va.

The fixed component in the earnings rate of the new I bond will likely be close to the spring rate, 0.2 percent. McBride expects 0.1 percent or 0.2 percent.

However, November's variable rate, also known as the inflation rate, will be less than half of what it was in the I bond spring series, at 0.74 percent.

I bonds bought before Nov. 1 will have the higher variable rate of 1.54 percent for six months. After six months, November's variable rate will be applied. For those who buy I bonds after Nov. 1, the new rate will be applied.

There are a couple of reasons that I bonds may not be the best investment these days.

An extremely low fixed rate for 30 years. I bonds issued between 2008 and the present have had extremely low fixed rates. That hasn't always been the case. According to TreasuryDirect.gov, between 1998, when the I bond debuted, and 2001, the fixed rate was north of 3 percent.

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"With inflation worries on the back burner for the near term, there is very little inflation compensation, even on five-year TIPS (Treasury Inflation-Protected Securities)," McBride says. "I bonds are unappealing."

I bonds can be redeemed without penalty after five years.

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